The Business of Specialty Gases

Specialty gases have become critical components for nearly every industry. The offerings are numerous and utilized in a variety of end-markets driven by trends in healthcare, environmental, semiconductor, food and beverage and research. The major producers of these products, Tier one industrial gas companies, their portfolio may only consist of 5-10% of Specialty gases, but it is arguably one of their most profitable segments. On the contrary, at the larger Independent producers the specialty gas portion of their portfolio is often a bit higher necessitating greater focus, resources and investment to be competitive in this space. This article will provide background on this intriguing segment of the industrial gas market, starting with its humble beginnings, current trends, challenges and market drivers, as well as the outlook and opportunities that will impact this segment for the foreseeable future. The full article was published in the November's Global Print edition of Gasworld magazine.

The Past

When one researches the “beginning of specialty gases,” Matheson is largely credited with being one of the first companies to begin offering a reliable source of high-quality scientific gases and equipment back in 1927. Some of Matheson's more notable accomplishments include the development of the lecture bottle, now used by virtually every major college and university in the world, and the supply of ultra-pure gases that served as standards for the first gas chromatographs (GCs). These high-quality scientific gases eventually became termed “specialty gases,” and covered not just industrial gases (N2, O2, Ar, He, H2, etc.) having purities exceeding 99.999% (>5 nines pure), but gas mixtures containing components at concentrations extending from the per cent range down to part per billion (ppb) and sometimes even part per trillion (ppt).

The Majors (Air Liquide , Praxair, Linde , Air Products ) during 1950s and 1960s began to dominate the specialty gas industry, primarily focused on the large and national accounts, as well as the high tech industries considered to be out of the technical expertise of the independent distributor. However, there were a few small players who started focusing their portfolios on the delivery and applications of specialty gases. One of the early examples in the US was Scott Specialty gases which eventually was acknowledged to be the best in class for EPA protocol, Natural Gas and many more high-end mixtures. Unlike the Majors, all they did was specialty gases and related equipment, and was very well connected with the standards bodies (i.e., ISO) and research entities (i.e., NIST). In a similar vein, Spectra Gases , American Gas Group, and several others began to carve out profitable niche markets, and eventually own significant shares in select markets. So much so, the Majors took notice and in the early 2000s many of these independent specialty gas players were acquired by Air Liquide, Praxair, Linde, Air Products, and even some of the independents such as Airgas.

With market expansion and strong margins, eventually greater competition forced this segment to get more efficient like the rest of the industrial gas industry. In the 1980s/1990s there started to be increased focus on automation in all areas of industrial gases. It started with bulk gases and gradually moved to packaged gases with a focus initially on industrial and the larger volumes. However, the move to automate the majority of the “end to end” specialty gases production process was demonstrated by a BOC Australia facility in 2017 with others following shortly afterwards. However, specialty gases have taken it a step further (driven by their customers), and producers are sharing specialty gas specifications and data with their customers electronically, sometimes even before the product ships from the producer. This exchange of data is fast becoming the norm in semiconductor and other high-tech end-markets.

The Present

As with every segment of the industrial gases, there are several trends and challenges that are affecting companies’ level of success in the Specialty Gas arena. From a trend’s perspective, tightening of product specifications, near shoring of supply chains, and reshoring of Semiconductor manufacturing are impacting the space in significant ways. Product specifications for many process continue to get tighter and tighter, as customers improve their products and discover that they need higher purity gases to eliminate potential areas of concern. For example, in the high tech end-markets of semiconductors, aerospace and research, data on impurities that may not have been in the spec previously, now are becoming more important in the eyes of the customer. This trends drives the need to develop/enhance existing analytical processes, or even requires investment in new technology to stay current or ahead of the latest trends.

The resiliency of supply chains continues to be top of mind for specialty gas producers and their customers. To better ensure continuity of supply, customers are encouraging (or even mandating in certain instances) the supplier to near-shore (or “domesticate”) their supply chains as much as possible. At a minimum, it has increased inventory levels at the customer and local/regional distribution sites. At the max, it may involve the supplier making domestic distribution or production investment with some assurance of future business. If these steps are not able to be done to the satisfaction of the customer, it often causes them to further diversify their supply-base to spread the risk. “The concept of domesticating the supply chain is clearly being driven by our customers, looking for local/regional suppliers, and encouraging us to build and invest domestically," states Matt Adams, Executive Vice President at Electronic Fluorocarbons . "This is not only driving new Capex requirements with and without customer commitments, but also forcing us to think more creatively and strategically with both Opex and Capex spending.”?In addition, Christian Card, Vice President of Sales at Noble Gas Solutions adds “as a result of continuing supply chain issues, customers are now casting a ‘wide net’ to other suppliers to ensure continuity of supply. No longer are 1 or 2 suppliers enough, but customers are looking for more as key products become in short supply."

Reshoring of semiconductor manufacturing back to the US and Europe, from Asia, is a huge deal for decades to come. The recent signing of the CHIPS and Science Act in the US is an example of the momentum around this trend. The legislation which includes roughly $52B in subsidies to boost US chip production, will benefit all the major semiconductor players. This year Intel broke ground on two new semiconductor production facilities, Taiwan Semiconductor Manufacturing (TSMC ) is also constructing one in Arizona (AZ) which represents the largest foreign direct investment in AZ's history, Samsung announced investment of up to $200B in Texas, and Micron Technology announced plans to invest $100B through the end of the decade to build leading-edge memory manufacturing in multiple phases in the U.S. Several other companies will benefit including Global Foundries, Texas Instruments, Applied Materials and Lam Research, among others. “The impact of reshoring of semiconductor production and its ecosystem (suppliers, R&D, etc.) to the US and EU and even Japan is one of the biggest trends affecting the electronic specialty gases space” states Mike Corbett, Managing Partner at Linx-Consulting . “The question is how much of the Asia infrastructure will need to move to support the US, EU and Japan semiconductor industries long term.” A world-class semiconductor factory will use >50 specialty gases depending on the process and spend $10’s of MM USD annually on those products. In addition, there is an EU Chips Act on its way, and Japan has already approved spending to boost their domestic chip industry.

From a challenges perspective, there are several that are uniquely affecting the specialty gas business, including raw material costs, extended lead-times, and rising customer expectations. The impact of inflation on almost every consumer and commercial product category is well documented. With respect to specialty gases, the raw material cost increases are well in excess of inflation in most cases, driven by increased labor and manufacturing and distribution costs at the manufacturing source. “Surely the cost of raw materials is outplacing inflation in many cases causing pricing pressure," states Matt Adams of Electronic Fluorocarbons. "But it is also forcing us to implement mitigation plans to offset some of those rising costs.” With many of the specialty gases utilizing a global supply chain, the impacts have been a bit worse. The result is margin pressure on the supply-base and ultimately pricing pressure on the customer base. For many companies, the trick has been to strike a balance between raising prices to make up for input cost increases while simultaneously and thoughtfully ensuring that they do not rise so much that it suppresses demand or damages customer relationships.

Extended lead times have been the result of the supply chain challenges many specialty gases are experiencing. Products such as rare gases (i.e., neon, Xenon, krypton), helium and select electronic specialty gases, especially those with a global supply chain have been impacted. Specialty gas producers have had to employ mitigating actions to minimize the impact to customers by increasing both raw material and finished goods inventories and domesticating their supply chains as previously discussed. “Product availability is clearly one challenge that appears to be growing” states Colleen Kohler, CEO of Noble Gas Solutions. “The Ukraine/Russia war is affecting rare gases, but the challenges extend to CO2, He, select specialty gases and even H2 in some geographies. So much so, this unpredictability has caused us to be more disciplined/detailed around cylinder planning/forecasting, time horizons, inventory sizing and the like to minimize customer impact.”

Rising customer expectations is both an ongoing trend as well as a challenge across most end-markets. Customers not only are tightening purity specs and mixture tolerances/accuracy, but continue to expect repeatable, error-free and often automated performance. This demand for “near” perfection poses a decision for many producers, to either reinvest what is needed to stay competitive, or move to the forefront by raising reinvestment in Operations and New Product Development to better anticipate customer needs. “The increased quality and analytical requirements to ensure limited variation ‘lot to lot’ by the suppliers has been a never-ending challenge for suppliers to the semiconductor industry,” states Mike Corbett of Linx-Consulting. “Customers of leading-edge fabs just cannot afford to have any product variation to impact production wafers valued at thousands of dollars each and a fab producing thousands of wafer starts per day.”

The Future

One thing for certain is that the outlook for the Specialty gases market is bright and filled with opportunity, despite the challenges it faces. The consensus growth forecast for specialty gases is 5-8% over the next 3-5 years, which is 1.5-2X core industrial gas growth. For semiconductors, the largest end market for specialty gases, the continued growth in Communications (Mobile, 5G), consumer electronics, Data (IOT, Analytics, AI/ML) and transportation (vehicle content, autonomous/assisted driving) is forecasted to grow in the high single digits range, with some segments in the low double digits over the same time horizon. In addition to the growth in the volume of semiconductors shipped, the complexity is increasing as more transistors are being placed in the same 3-dimensional space. As the density of the device increases, it drives greater demand for select specialty gases as well as the need for higher purity.

In healthcare, the use of specialty gases is driven by increasing therapeutic (i.e., medical O2, Nitric oxide and other respiratory needs), diagnostic (calibration gases), and surgical needs (i.e., lasers). These needs along with the aging demographic (especially) in western societies, along with the growing worldwide sophistication of healthcare capabilities, grow of this segment is expected to be in the mid-single digit range for the medium term.

In the calibration segment, which span continuous/mobile emission and ambient monitoring on the environmental side, to being used as a reference to calibrate gas analyzers or detectors in most every end-market, applications and usage are forecasted to grow at slightly above core industrial gas levels. A few potential examples, the energy transition is driving the need to look at H2 purity from a variety of different manufacturing processes all generating a different set of impurities, which may/will require new standards for select end-market uses. With every new specialty material introduced in a semiconductor device (i.e., new or tweaked dielectric material), there is a need to not only measure its purity, the impact of its purity on the process and maybe even developing a standard if it does not exist. And finally, at the recent Gasworld CO2 Summit and the interest in using renewable CO2 from nontraditional sources such as Biogas. It was acknowledged that before CO2 is more widely used from these sources in certain applications (i.e., food and beverage), it will require a greater level of analysis and understanding of non-traditional impurities that are present in biogas generated CO2, which is good news for specialty gases.

In addition to organic and emerging growth in these segments as well as others (i.e., aerospace, food and beverage, etc.) there are related opportunities in this space for specialty gas producers. “There is no shortage of new specialty gas opportunities,” states Christian Card of Noble Gas Solutions. “For example, although requirements seem to be constantly changing in the Cannabis market it shows potential, a variety of segments in Food & Beverage are continuing to grow, as well as pharmaceutical research and even the hydrogen space due to the energy transition are showing growth potential just to name a few." One overarching opportunity is offering sustainable specialty gases as customers look to lower their carbon footprints. The end-market leading this opportunity is semiconductors, largely because some of its critical raw materials have significant greenhouse warming potential (i.e., NF3 or nitrogen trifluoride). “Sustainability of the products being used in semiconductor manufacturing has had the focus of the industry for several years,” states Mike Corbett. “However, as many of the semiconductor industry’s biggest customers such as Google and Apple start to advance their NetZero strategies, it has raised the focus of the industry leaders (i.e., Intel, Samsung, TSMC) to make commitments to be net-zero by a particular date.” As a result of this pressure, there are several alternatives currently under development.

Also, how one looks at their challenges, can also lead to opportunities in this space. The challenges of higher purity, particle reduction, enhanced package safety, greater accuracy, etc., are often incorporated in a technology roadmap as part of the supplier’s New Product Development plan. By engaging customers early in this process in helping to define expectations clearly and even jointly develop solutions is critical in converting these challenges/hurdles into mutually beneficial opportunities. “A robust technology roadmap is critical to identify those opportunities in partnership with key customers,” states Matt Adams. “However, integral to this 'product-focused' roadmap is often a complimentary analytical equipment roadmap that is able to support delivery of those tighter product specifications, especially if you serve high-tech end-markets. For example, being ready and able to participate in ‘Ship-to-Control’ methodologies requires a level of analytical and data automation just to be an approved supplier for some companies.”

In Closing

Specialty gases is one of the most unique and dynamic segments of the broader industrial gas market. Its large portfolio of products that meets customer needs across a wide array of end-markets, historically has delivered above average growth which continues up to present day. Looking forward, specialty gases is forecasted to continue to be one of the fastest growing segments of industry gases for the short to medium term, with both Majors and Independent Specialty gas producers well-positioned to support this segment for years to come.

-----------

Art Anderson?is Managing Principal for AH Anderson Consulting, LLC.?He has more than 35 years of business and consulting experience, most of which was spent at Air Products where he held leadership roles in sales, marketing, product and regional P&L management for the full portfolio of offerings. In addition, he held corporate leadership roles in Customer Engagement, E-commerce, and Global Business Services leveraging a host of digital technologies. He currently provides strategic advisory and hands-on support to companies in the Industrial gas and Specialty chemicals industries looking to improve their competitive position, productivity and sustainability of their operations and products. Learn more at?www.ahandersonconsulting.com .

#Gasworld ?#specialtygases #cylinders #reshoring ?#semiconductors ?#chipsact #airliquide ?#linde ?#airproducts #ukrainecrisis ?#sustainability ?#supplychain #analytical #highpurity #netzero #apple #google #samsung #tsmc #micron #intel #Efgases #noblegas